The Best Way to Balance the Budget

People in Washington have incredibly bad memories. The last time that the United States balanced its budget was just a decade ago. Even though this is not distant history, almost no one in a policymaking position or in the media seems able to remember how the United States managed to go from large deficits at the start of the decade to large surpluses at the end of the decade.

There are two often-told tales about the budget surpluses of the late 90s: a Democratic story and a Republican story. President Clinton is the hero of the Democratic story. In this account, his decision to raise taxes in 1993, along with restraint on spending, was the key to balancing the budget.

The hero in the Republican story is Newt Gingrich. In this story, the Republican Congress that took power in 1995 demanded serious spending constraints. These constraints were ultimately the main factor in balancing the budget.

Fortunately, we can go behind this he said/she said to find the real cause of the switch from large budget deficits to large surpluses. This one is actually easy.

In the spring of 1996, the non-partisan Congressional Budget Office (CBO), whose numbers are taken as being authoritative in Washington, projected that the government would have a deficit of $244 billion in 2000, or 2.7 percent of GDP. Instead, the government actually ran a budget surplus in 2000 of almost the same size. This amounted to a shift from deficit to surplus of more than 5.0 percentage points of GDP; an amount that is equal $750 billion given the current size of the economy.

The reason for picking the spring of 1996 as the starting point is that this is after President Clinton’s tax increases and spending restraints were all in place. It was also after all the spending restrictions put in place by Gingrich Congress had already been passed into law.

In other words CBO knew about all of the deficit reduction measures touted by both political parties and it still projected a $244 billion budget deficit for 2000. Furthermore, the changes to the budget in the subsequent years went the wrong way. According to CBO’s assessment, the legislated changes between 1996 and 2000 actually added $10 billion to the budget deficit.

The trick that got us from the large deficit projected for 2000 to the surplus that we actually experienced in that year was much stronger than projected growth. CBO projected that growth would average just 2.1 percent. It actually averaged almost 4.3 percent. Instead of ending the period with an unemployment rate of 6.0 percent, unemployment averaged just 4.0 percent in 2000.

It would be helpful if policymakers paid more attention to this history, since it should remind them that even if their primary concern is the deficit, and not economic growth and low unemployment, economic growth may still be the best way to reach their deficit targets. It is all but impossible to balance the budget when the unemployment rate is above 8.0 percent. By contrast, if we got the unemployment rate back down below 5.0 percent (where it was before the onset of the recession), we would get most of the way back to a balanced budget even with no additional changes to the budget.

If the deficit hawk crew could remember back to the 90s then they might be pushing more aggressively for measures to spur growth. This would include not only fiscal stimulus, but also more expansionary measures from the Federal Reserve Board. The Fed has consistently been restrained in its measures to boost the economy because the whining of the inflation hawks.

The budget hawks should realize that if they really care about deficits, the inflation hawks are their enemies. They should be pushing for more expansionary monetary policy ? steps like targeting long-term interest rates or even a somewhat higher inflation rate ? there is no reason that the Fed should not be pursuing this path, at least until there is some evidence of inflation posing a problem.

The Fed, together with the Treasury, could also be pushing for a lower dollar. A monetary policy that is explicitly designed to reduce the value of the dollar would provide a boost to net exports and thereby to economic growth.

Finally, if the Fed opted to hold the bonds that it has purchased through it various quantitative easing programs it could directly reduce the deficit. The reason is that the interest paid on these bonds is paid to the Fed and then refunded to the Treasury. It therefore leads to no net interest burden to the government. If the Fed bought and held $3 trillion on government bonds, it would leave to interest savings of close to $1.8 trillion over the course of the next decade.

If the deficit hawks had better memories and a bit of creativity, they would be talking about items like faster growth and increasing the Fed’s holdings of government bonds. Unfortunately, our policymakers don’t do very well in either the memory or creativity department. Therefore we are discussing privatizing Medicare, block granting Medicaid and cutting Social Security. That’s Washington for you.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This column was originally published by The Guardian.

More articles by:

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC. 

Weekend Edition
December 14, 2018
Friday - Sunday
Andrew Levine
A Tale of Two Cities
Peter Linebaugh
The Significance of The Common Wind
Bruce E. Levine
The Ketamine Chorus: NYT Trumpets New Anti-Suicide Drug
Jeffrey St. Clair
Roaming Charges: Fathers and Sons, Bushes and Bin Ladens
Kathy Deacon
Coffee, Social Stratification and the Retail Sector in a Small Maritime Village
Nick Pemberton
Praise For America’s Second Leading Intellectual
Robert Hunziker
The Yellow Vest Insurgency – What’s Next?
Patrick Cockburn
The Yemeni Dead: Six Times Higher Than Previously Reported
Nick Alexandrov
George H. W. Bush: Another Eulogy
Brian Cloughley
Principles and Morality Versus Cash and Profit? No Contest
Michael Duggin
Climate Change and the Limits of Reason
Victor Grossman
Sighs of Relief in Germany
Ron Jacobs
A Propagandist of Privatization
Robert Fantina
What Does Beto Have Against the Palestinians?
Richard Falk – Daniel Falcone
Sartre, Said, Chomsky and the Meaning of the Public Intellectual
Andrew Glikson
Crimes Against the Earth
Robert Fisk
The Parasitic Relationship Between Power and the American Media
Stephen Cooper
When Will Journalism Grapple With the Ethics of Interviewing Mentally Ill Arrestees?
Jill Richardson
A War on Science, Morals and Law
Ron Jacobs
A Propagandist of Privatization
Evaggelos Vallianatos
It’s Not Easy Being Greek
Nomi Prins 
The Inequality Gap on a Planet Growing More Extreme
John W. Whitehead
Know Your Rights or You Will Lose Them
David Swanson
The Abolition of War Requires New Thoughts, Words, and Actions
J.P. Linstroth
Primates Are Us
Bill Willers
The War Against Cash
Jonah Raskin
Doris Lessing: What’s There to Celebrate?
Ralph Nader
Are the New Congressional Progressives Real? Use These Yardsticks to Find Out
Binoy Kampmark
William Blum: Anti-Imperial Advocate
Medea Benjamin – Alice Slater
Green New Deal Advocates Should Address Militarism
John Feffer
Review: Season 2 of Trump Presidency
Rich Whitney
General Motors’ Factories Should Not Be Closed. They Should Be Turned Over to the Workers
Christopher Brauchli
Deported for Christmas
Kerri Kennedy
This Holiday Season, I’m Standing With Migrants
Mel Gurtov
Weaponizing Humanitarian Aid
Thomas Knapp
Lame Duck Shutdown Theater Time: Pride Goeth Before a Wall?
George Wuerthner
The Thrill Bike Threat to the Elkhorn Mountains
Nyla Ali Khan
A Woman’s Selfhood and Her Ability to Act in the Public Domain: Resilience of Nadia Murad
Kollibri terre Sonnenblume
On the Killing of an Ash Tree
Graham Peebles
Britain’s Homeless Crisis
Louis Proyect
America: a Breeding Ground for Maladjustment
Steve Carlson
A Hell of a Time
Dan Corjescu
America and The Last Ship
Jeffrey St. Clair
Booked Up: the 25 Best Books of 2018
David Yearsley
Bikini by Rita, Voice by Anita